Euro Softens Against Dollar, Pound as Inflation Slides and ECB's Cœuré Warnings on Growth
- Euro to Dollar exchange rate latest: 1 EUR = 1.0675 USD
- Euro to Pound exchange rate latest: 1 EUR = 0.8560 GBP
- Euro to Australian Dollar exchange rate latest: 1 EUR = 1.3995 AUD
The single currency was seen giving back earlier gains as London markets headed into the final throes of the month of March.
Earlier, the Euro showed its mettle and rose despite news that Eurozone inflation is falling again and amidst warnings on the economic outlook from a key member of the European Central Bank.
The Euro was one of the better performers in month-end trade as the currency looked to put a tough week behind it.
But, readers beware - today's is month-end therefore global currency flows might be moving independent of the data.
We often find the US Dollar underperforms at month-end as investment managers rebalance their hedges and after another month of gains for US stocks the Dollar is likely to be under pressure.
The Euro could also be a winner in this context.
Indeed, the Euro should be doing a lot worse on the following two key points:
- Eurozone inflation is falling at an eye-opening speed
- A leading ECB member warns that risks to the Eurozone's outlook are evenly balanced and no longer biased to the upside.
Eurozone Inflation Falls
Eurozone inflation data could well be the most important economic data point on the docket in international finance at the present time.
Eurostat reports that Euro area annual inflation is expected to be 1.5% in March 2017, down from 2.0% in February 2017.
Markets were forecasting a rise of 1.8%, so this is a big miss and points to a trend of declining inflation that might be more agressive than policy-makers at the ECB were expecting.
Falling prices suggest the European Central Bank might be coaxed back into further measures to try and boost inflation.
This kind of monetary stimulus, that could even see the ECB's quantitative easing programme expanded, would be expected to weigh heavily on the Euro.
Therefore, the odds of the Euro seeing downside pressures exerted by the ECB in the future have risen markedly.
"The Euro is coming under increasingly corrective pressure as inflationary pressures are beginning to ease. This was seen in the weaker than expected German inflation data that was posted yesterday, which bodes ill for today’s March flash CPI for the Eurozone," says Richard Perry at Hantec Markets.
Core CPI is arguably more important however as it reflects inflation generated by ‘organic’ economic growth and is therefore what the ECB will be watching.
Analysts were forecasting a rate of 0.8% to be released but the actual number that came in was 0.7%.
“Consistent with weak underlying price pressure, the market is pricing in lower inflation in coming months, which in our view is in sharp contrast with the expectations of a policy rate hike this year,” says analyst Pernille Bomholdt Henneberg at Danske Bank in a note to clients dated March 29.
Expectations that the ECB would begin to talk about tightening before the end of its quantitative easing programme have quickly reversed on the back of the inflation data.
These expectations also took a hit this week on reported denials that the ECB was looking to end its easing programme from Governing Council sources.
"This has started a Euro decline and a set of weak inflation readings today could accelerate the move," says Perry.
Inflation is About to Pop: Nomura
Could recent inflation data be nothing more than a setback in an upward trend?
This is a likely scenario argues Bilal Hafeez, a foreign exchange strategist with Nomura in London.
“Our analysis of slack measures in the eurozone suggests inflation pressures are brewing, warranting a more hawkish ECB, higher yields and a stronger euro,” says Hafeez.
The normalisation sequence will matter – if the ECB tapers and the EUR curve bear steepens, JPY would be the clear underperformer.
Meanwhile, an early rate hike would weaken USD, GBP and CAD more.
Nomura expect EUR/USD to test 1.15 by year-end.
ECB's Cœuré on Growth
Benoît Cœuré, Member of the Executive Board of the ECB, told an audience at an event organised by Bruegel in Brussels that, "the latest incoming data have shifted the balance of risks for growth towards neutral territory."
The tone struck by Cœuré is suggesting that the ECB is keen on keeping expectations regarding any future interest rate rises contained.
We heard this week that the ECB was unhappy with the market's reaction to their March policy meeting which saw Eurozone bond yields and the Euro rise as markets started to bet the ECB would start withdrawing its quantitative easing programme over coming months.
A chance of a rate rise at the ECB in late 2017 was even muted.
However, Cœuré appear unhappy with this development, particularly in light of recent inflation data.
